SECURE 2.0 for Employers: A Guide to the Retirement Plan Auto-Enrollment Requirement
SECURE 2.0 for Employers: A Guide to the Retirement Plan Auto-Enrollment Requirement
On average, retirement plans with auto-enrollment see participation rates that exceed 90%, whereas plans with traditional opt-in enrollment have average rates of 28% among new hires. Auto-enrollment significantly enhances the success of retirement savers—and it’s set to become a mandatory feature for new retirement plans in the near future.
The SECURE Act 2.0 is a set of bipartisan legislation passed by Congress in December of 2022, aiming to boost retirement savings nationwide. Expanding upon the SECURE Act passed by Congress in 2019, it brings forth several changes that impact employers offering a retirement plan, including a requirement for auto-enrollment starting in 2025. This article will guide you through the auto-enrollment requirement, its implementation timeline, and what employers need to know.
What Is Auto-Enroll and When Will It Be Required for Retirement Plans?
Auto-enrollment is a feature that automatically enrolls eligible employees for their company’s retirement plan unless they actively choose to opt out.
Starting in 2025, new 401(k) and 403(b) plans established after the passing of SECURE 2.0 (December 29, 2022) must automatically enroll all eligible employees at a default contribution rate between 3 and 10% of their salary, unless an alternative rate is selected by the employee. The most common default deferral rate for plans with auto-enrollment is 6%, but employers can choose a rate anywhere from 3 to 10%.
The auto-enrollment requirement goes into effect on January 1, 2025, giving employers time to prepare and update their plans to comply with new regulations.
Which Businesses Are Impacted?
Businesses with a plan that was established after the enactment of SECURE 2.0 (December 29, 2022) must automatically enroll all eligible new hires, and existing eligible employees who have not already opted out of the plan.
There are a few types of organizations that will be exempt from the requirement:
- Employers with a plan that was established before the enactment of SECURE 2.0 (December 29, 2022)
- Some companies are exempt conditionally:
- New companies that have been operating for less than three years
- Businesses with 10 or fewer employees—until an 11th is hired
For guidance specific to your business’s particular circumstances, we recommend consulting with a financial advisor.
Automatic Escalation
In addition to auto-enrollment at a default contribution rate, plans must also automatically escalate contributions by 1% each year until they reach a predetermined rate by the employer, between 10 and 15%.
This means that each year, the contribution rate—either the default set by the employer or manually adjusted by the employee—will increase by 1% until it reaches the maximum contribution rate determined by the employer (between 10 and 15%).
For example, suppose a business starting a new 401(k) plan for its employees has chosen a 6% default contribution rate and a 12% maximum contribution rate. The deferral rate will increase by 1% each year until it reaches 12% and then will no longer automatically escalate.
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
|---|---|---|---|---|---|---|---|
| Employee Contribution Rate | 6% | 7% | 8% | 9% | 10% | 11% | 12% |
When establishing a retirement plan, a business must send a notice to employees explaining the plan details, including how to opt out or change the default contribution rate. Auto-enrolled employees must also have a 90-day window to reclaim their contributions without penalty. Many retirement plan providers will help you by sending these notices on your behalf.
Staying compliant with these new requirements will help businesses to stay up to date with the new legislation. Plus, implementing these changes will also encourage employee participation and help drive plan success.
What Employers Need to Do
Work with your service provider (third party administrator or recordkeeper) and financial advisor, if you have one, to ensure your plan aligns with the new requirements. Confirm with them that your plan documents are up to date and your employees have been informed.
The Benefits of Auto-Enrollment
The SECURE Act 2.0 requires auto-enrollment to enhance access to retirement savings and boost participation rates among employer-sponsored programs.
This legislation aims to address common barriers to retirement savings. Employees may not sign up because they perceive onboarding to be time-consuming, they have an “I’ll do it later mindset,” or they don’t want to defer a portion of their pay. Auto-enrollment simplifies the process and shifts the dynamic, making opting in the default choice for employees instead of opting out.
At Vestwell, we have encouraged our clients to include an auto-enrollment feature in their plan design ahead of the auto-enrollment requirement. Providing businesses with a future-facing retirement plan that both complies with legislative changes and encourages employees to participate gets us one step closer to reaching our mission of closing the savings gap.
Conclusion
The SECURE Act 2.0 represents an exciting shift towards a more inclusive approach to retirement savings. With increased participation rates and higher default contribution amounts, more employees will participate in their company’s retirement plan and will save more for their future. For employers, meeting these new requirements shows a commitment to the financial well-being of your team by encouraging them to save more.
At Vestwell, we work with employers of all sizes to build a retirement plan that not only aligns with their business and employees’ specific needs but also sets them up for future success. With our Secure Act 2.0 Tax Credit Calculator, you can see what tax credits may be available to you.
